As if caught in an ever-increasing hurricane, US Treasury Secretary Janet Yellen was rocked from side to side this week over the issue of how government and financial authorities should support wealthy uninsured bank depositors.
On Tuesday, she told a meeting of bankers that the government was prepared to extend the bailout of depositors at Silicon Valley Bank and Signature Bank, some of whom hold tens of millions of dollars in their accounts, to other depositors in other banks if necessary.
This was correctly recognized as an implied guarantee by the government that it was insuring all the money held in the US banking system, a total of over $17 trillion, and thus provoked criticism from “free market” advocates. “, in particular Wall Street Journal (WSJ).
The main concern of the WSJ is not the distribution of money to the rich and super-rich per se, but what such a guarantee ultimately means for the stability of public finances and American capitalism as a whole, if the market cannot do its job in carrying out necessary purges.
In response to this and other criticism, Yellen told a Senate committee the next day that financial bodies were not considering “blanket” coverage for deposits above the $250,000 limit covered by the legislation.
Wall Street dismissed Yellen’s remarks. It fell sharply in the last half hour of trading on Wednesday, with the Dow Jones losing more than 500 points.
The Treasury Secretary, who like all government officials tries to present herself as serving the mass of the population, got the message from the real power-holders.
In her address to the House on Thursday, she backtracked on remarks made at the bankers’ meeting two days earlier.
“We used important instruments to act quickly to prevent contagion,” she said. “And these are instruments that we could use again. The strong measures we have taken guarantee the security of Americans’ deposits. We would certainly be ready to take additional measures if necessary. Following his remarks, Wall Street stabilized.
To understand what the issuance of deposit guarantees entails, it is worth digging deeper into what the figures put forward mean.
Deposits up to $250,000 are automatically guaranteed by the Federal Deposit Insurance Corporation as required by law.
The cutoff point is far greater than the amount held by millions of American families who live hand-to-mouth, often having to resort to their credit cards just to make ends meet.
According to official figures, the median balance held by US citizens in their accounts is just $5,300.
Less than half of U.S. households, about four in 10, said in January 2022 that they would be able to cover an unexpected $1,000 expense, and that number has likely fallen since as a result of continued wage compression. and rising prices, especially of basic necessities.
But the rich and super-rich live on a whole other planet and they demand that it be protected at all costs.
The “Americans” whose deposits Yellen’s measures must protect are not ordinary workers and their families, who are far from having $250,000 in their bank accounts. It’s people like venture capitalist Peter Thiel who revealed he had deposited $50 million with failed bank SVB, even after advocating that others should no longer use it. Perhaps he considered the millions he left there as loose change.
Yellen’s reversal on the issue of support for the ultra-rich and financial elites is by no means an isolated incident.
Rather, it is a particular manifestation of central Fed policy [Federal Reserve], regulators and government. Whatever admission they may make from time to time of the need for sound public policy, they always come back to their key mission – the protection of the financial oligarchy that dominates the economy.
This was in evidence in 2008 when the speculative, and sometimes outright criminal, activities of finance capital caused a collapse of the financial system. Banks and trusts were bailed out to the tune of hundreds of billions of dollars and the Fed rolled out trillions of dollars under its quantitative easing (QE) program, allowing speculation to continue.
The working class was forced to pay for this policy as unemployment rose to over 10 percent, homes were foreclosed on and exploitation in factories intensified, often through the widespread adoption of the wage-tier system and temporary work.
The 2008 bailout, quantitative easing and the resulting unbridled speculation meant that when the pandemic hit in early 2020, the administration refused to implement a policy of eliminating the virus, fearing that the necessary sanitary measures do not lead to the collapse of the financial house of cards.
As a result, the Trump administration, with the support of Democrats led by House Speaker Nancy Pelosi, passed the CARES Act, doling out billions of dollars to the trusts while making some minor concessions to the masses of the population in an attempt to appease social anger.
The Fed again stepped up its efforts and, in response to the March 2020 market freeze, injected an additional $4 trillion, acting as a guarantor for every sector of the financial system.
But these measures had consequences.
The refusal to eliminate COVID has created a crisis in supply chains, causing inflation to jump. Price increases have been intensified by the flood of cheap money, outrageous profits from food and energy trusts, speculation in commodity markets funded by near-free money provided by the Fed and other central banks , and the consequences of the NATO war led by the United States against Russia in Ukraine.
The eruption of the highest inflation in four decades has changed the landscape. The Fed then faced its greatest fear – the development of a resurgence of the working class and the intensification of the class struggle artificially suppressed over the previous four decades.
The Fed then made a reversal. It began raising interest rates in March 2022, citing the need to fight inflation. It is vital to understand the class dynamics at work here because it is the key to understanding the current situation, what lies ahead and what the response of the working class must be.
His measures – lifting interest rates from near zero to over 4.5 percent year on year – have nothing to do with driving down prices but are aimed at suppressing the wage protest movement of working class.
This must be achieved by ending what Fed Chairman Jerome Powell continually calls a “stressed” labor market through the economic slowdown, rising unemployment and the onset of a recession if that is deemed necessary.
Interest rate hikes have now triggered a financial crisis, exemplified by the collapse of SVB bank. Having an abundance of money due to the Fed’s Quantitative Easing policy, she placed her funds in Treasury bonds, supposedly the safest financial asset. But as interest rates rose, the market value of these bonds fell below their book value.
As long as the money was flowing, it wasn’t a problem. But when the money started flowing out, as depositors dipped into their holdings, the bonds had to be sold and the losses realized.
Powell and others called SVB a “special case”. But the analysis revealed that its structure is found elsewhere. The market value of bonds held by US banks is estimated to be down $1.7 trillion, not far below their capital base of around $2 trillion, which in essence would wipe it out if these losses had to be realized.
Moreover, small and medium-sized banks, such as SVB, also hold a large share of the interest-rate sensitive commercial real estate and real estate development loans, which are widely predicted to suffer the same fate.
The development of this crisis has caused a wave of fear in the ultra-rich classes. When SVB’s problems surfaced, hedge fund operator Bill Ackman immediately took to Twitter to call for major intervention, without which the economy could not function properly.
Such reactions reveal that the fabulously rich and super-rich have viewed death as if they were hunched over a gaping tomb.
But that doesn’t mean they will somehow push for reform – there aren’t any, anyway – or that their toxic system will simply collapse on its own.
On the contrary, building on their long history of repression and violence, their growing fear means that they will unleash ever stronger attacks on the working class, just as they did after 2008, and that they will demand from the capitalist state a continuous supply of money to maintain their world of wealth and privilege at the expense of society.
For the working class, the developing crisis represents a direct challenge. She is faced with the task of making a new world, based on social equality. This can only be achieved through a political struggle to end the capitalist profit system, thus paving the way for the establishment of socialism. This challenge must be met by building the revolutionary party that will lead this struggle.
(Article published in English on March 25, 2023)
